Happy 5-29 Day!
There are many ways to save for college. Of the two types of education investment accounts, the 529 college savings plan is the most popular tax-advantaged account being used today. They’re popular because some states allow residents to take a tax deduction for contributions, they have high contribution limits, generous beneficiary transfer policies, and investment gains are tax-free when used for qualified education expenses.
Becoming a Dad
When my wife was pregnant, I promised that I would start a college savings plan for my daughter on the day she was born as a birthday gift. Being a first time dad, I had no idea what the entire process of delivery and newborn care entailed. So, it should be fairly obvious that I didn’t start a college savings plan on the day she was born. It actually took me a few months to even get started doing the research necessary to decide how I would save for her college education.
There were a couple things I had to consider before I got started. First, I wanted to stay congruent with my philosophy, “There is no such thing as financial aid for retirement.” With that, and my personal experience in mind, I had to suppress my paternal instincts to remember that financial aid, grants, and scholarships (or maybe the GI Bill) will be available to my daughter in the future. Second, paying for her entire college education and related expenses is just not going to happen. My wife and I worked while we went to school and we did just fine. I think there are a lot of opportunities and plenty of lessons to be learned about independence during the young adult years. Those learning opportunities should be taken advantaged of, not subsidized.
I initially thought about opening a Coverdell ESA because of the ability to use the funds to pay for education expenses during the K-12 years and the IRA-like investment flexibility. However, towards the end of 2012, there was fear that the $2,000 annual contribution limit would be reduced to $500 a year. The debate about the future of the Coverdell caused companies like Vanguard to stop offering the accounts to new customers completely. There were, and still are, a handful of low-cost customer oriented firms that offer Coverdell accounts. However, after much debate, I decided to go forward with a 529 plan (a large part of the decision was because of beneficiary change flexibility).
Choosing a 529 Plan
The general rule of thumb for selecting a 529 plan is to see if your state offers a tax deduction for participation. If they do, the tax deduction will usually negate the costs or investment fees related to the plan. You can participate in a 529 plan from any state (Remember that you can choose to go to school anywhere. For example – just because you participate in Utah’s 529 plan, it doesn’t mean you have to go to school in Utah). If your state doesn’t offer a tax deduction and doesn’t sponsor a low cost 529 plan, don’t be shy about going out of state.
I am a resident of California. Because the state doesn’t offer a tax deduction and doesn’t have a great 529 plan, I had to look elsewhere. My requirements were simple.
- Must have low-cost index funds choices, preferably from the Vanguard family of funds.
- No, or low administrative fees.
- 24/7 online account access that has plenty of self-service options.
- Bank account linking, so I don’t have to send checks for contributions.
- Electronic statement/document delivery.
After several days of research, I found that the Utah Educational Savings Plan was the best fit. The choice was further solidified when I found out that Allan Roth, whom I’ve had the pleasure of sharing a dinner table with, also endorsed the Utah 529 college savings plan.
Here are my favorite aspects of the Utah UESP:
- The option to choose age-based, static, or customized options.
- Low fees and defined expenses that are easy to understand . In fact, they have a calculator on their site so you will know exactly how much you will be spending based on your asset allocation.
- They have Vanguard Institutional Plus index funds, which have operating expense ratios as low as 0.02%. That’s rock bottom.
- The website is easy to navigate. It’s painless, and quick, to sign up. Participants have a wide range of self-help options using the online account access.
I opened the account in October 2012 and funded it with some gift money my daughter received when she was born. I chose the Customized Static option and started with this allocation:
- 70% Total Stock Market Index Fund
- 20% Total International Stock Index Fund
- 10% Total Bond Market Index Fund
It wasn’t until November, four months after my daughter was born and we were debt free, that I actually made the birthday contribution. The timing couldn’t be better (although it was by pure luck and I don’t encourage any attempt at market timing). The account has been able to capture the ride upwards and has an excellent performance record so far (approximately a 15% gain in the middle of May). The only additional contributions I’ve made to the account have been Christmas, Lunar New Year, and recycling money. I don’t expect that I’ll make regular automatic contributions anytime soon, but I’ll be sure to add to the account annually.
I’m interested to find out what the administrative process is like when it comes time to withdraw from the account. The withdrawal of funds seem easy enough from the 529 plan itself, but I wonder what burden of proof is necessary to claim “qualified expenses” on a tax return. Excellent record keeping will be a must. I’m sure it’ll go by in a flash, but it’s still many years until I have to use the funds from the 529 – so I’m not too worried about the process quite yet. I’m very happy with the choices I’ve made, and starting, adding money, and investing in the account has been a really easy process.
What about you? Are you planning to save money for your child’s education? How do you plan on doing it?
Talk to me, Goose.